Mexico and the great trade collapse

Raymond Robertson 27 November 2009

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The great trade collapse of 2008 raised concerns worldwide about the viability and the progress of globalisation. It had ramifications across the globe, but some developing countries, such as Mexico, were especially affected. This chapter considers the collapse from a North American perspective, evaluating some of the implications for developing countries. Taking a purely North American perspective on the dramatic drop in world trade during 2008 and the first half of 2009 could easily lead one to potentially overemphasise the role of the US recession on the drop in trade. But US trade statistics are timely, high-quality and publicly available and, of course, the US is the world’s largest importer, so it has a great impact on developing countries’ trade flows.

The crisis from a North American perspective

Figure 1 illustrates two key facts concerning the US’s recent trade performance:

  • It shows that the dramatic drops in imports and exports closely track US GDP between September 2007 and September 2009.
  • It shows that the recovery is underway. While it might be too soon to declare a reversal with confidence, the figures for September 2009 seem to suggest that the worst may be over. US imports have been rising since May 2009.

These two facts are consistent with the view that the “great trade collapse” has been a cyclical phenomenon rather than a symptom of stumbling globalisation. This does not mean, however,that the great trade collapse has been without consequence.

Figure 1 US imports and exports

Source: http://www.census.gov/indicator/www/ustrade.html.

Mexico has been hit especially hard

Countries closely linked to the US have been hit especially hard. Mexico, for example, suffered more than many other countries. In the last quarter of 2008, Mexico’s GDP contracted at an annualized rate of 10%. According to the Federal Reserve Bank of Dallas, Mexico’s GDP is expected to contract by 6% in 2009 (Skelton, and Quintin 2009).

Figure 2 Mexico’s Imports and Exports

Source: Banco de Datos INEGI. Years mark September of reference year. Several factors played a role in Mexico’s contraction. An intensified drug war, the swine flu outbreak, and trade disputes have all contributed, but the contraction of Mexico’s largest export market is especially prominent.

Mexico’s trade has historically been closely related to the US. In 1993, the monthly average share of Mexican exports going to the US was over 80%; 5 years after NAFTA, it rose to almost 90%. In 2008-2009 (through September) that average was back down to 80% – consistent with a shift away from a market that was contracting especially vigorously.
Figure 2, which shows Mexico’s nominal imports and exports since 1991, presents two stand-out facts:

  • Mexico’s total exports have been rising dramatically since 1991.

In nominal dollar terms, Mexico experienced an eight-fold increase in total trade between 1991 and 2007.

  • Mexico experienced a dramatic drop in total trade during the great trade collapse.

Total trade fell from a peak of about US$56 billion in July 2008 to US$32 billion in January 2009 – a decline of 43%. Given Mexico’s reliance on the US market, it is unsurprising that this drop corresponded closely with the drop shown in Figure 1.

Why did Mexican trade fall so much?

One of the possible, if not most likely, explanations for Mexico’s especially dramatic drop in trade has to do with the changing nature of Mexican manufacturing.

Supply chain industries

A dominant feature of Mexico’s industry is the so-called ‘maquiladora’ sector. Also known as the “in-bond” industry, maquiladora trade is very similar to what is called export processing in Asia. Parts and components are imported for assembly and then exported with very little of the assembled products remaining inside Mexico. Automobile dashboards provide a good example. They are assembled from imported parts and re-exported as components that are then assembled into the final vehicle. Mexican trade became increasingly dominated by maquiladora trade since Mexico’s liberalisation of foreign investment at the end of the 1980s and beginning of the 1990s.

On November 1, 2006, the Mexican government formally integrated the firms in the maquiladora industry into the PITEX programme (Programa Importación Temporal para Producir Artículos de Exportación) thus ending the practice of separating maquiladora trade from other manufacturing trade statistics. Statistics prior to that date, however, reveal a great deal about changes in Mexican manufacturing. Between January 1991 and December 2001, the maquiladora share of total exports rose from 29% to 52% before settling down to 46% in December 2006 (the last date maquiladora trade is separately identified).

This pattern implies a very close relationship between imports and exports – a feature which is apparent in Figure 2. Mexican imports and exports track each other very closely – supporting the hypothesis that Mexico’s trade is characteristic of being an integral part of an international production process.

Maquiladora trade and volatility

Bergin et al. (2009) suggest that the maquiladora sector is much more volatile than the corresponding US industries, raising the possibility that Mexico’s extreme drop may simply be a result of specialisation in volatile stages of production.

But the excess volatility seems to have extended beyond the maquiladora sector to the rest of the Mexican economy. Consider again Figure 2. The span covered in Figure 2 covers three US recessions, roughly corresponding to the years 1991, 2001, and 2008. Mexico’s trade response to the 2001 recession is also observable in Figure 2, but there is little or no response detectable to the 1991 recession. Robertson (2009) offers one possible explanation – a change in production structure that followed the North American Free Trade Agreement (NAFTA) in 1994.

One of the goals of NAFTA was to increase foreign investment in Mexico. Not surprisingly, there was a significant increase in foreign investment – and a corresponding rise in maquiladora employment and output – following NAFTA in the late 1990s. Furthermore, however, it is possible that non-maquiladora manufacturing may have moved towards being part of the North American production chain. Evidence for this change could be found by evaluating whether non-maquila Mexican and US production workers were substitutes or complements.

By matching US and non-maquila Mexican employment of production workers, for all available manufacturing sectors, and estimating dynamic labour demand equations, Robertson (2009) finds evidence that prior to NAFTA, US and Mexican production workers were substitutes. After 1994, when NAFTA went into effect, the relationship reversed, suggesting that US and Mexican production workers are complements.

In other words, it seems that NAFTA integrated Mexico more fully into the US production structure, making it more responsive to changes in US production.

Supply chains and Mexico’s trade collapse

This line of analysis suggests that Mexico’s integration into the US supply chain is one reason Mexico’s trade collapsed so far and so fast when the US manufacturing sector was hit by the crisis.

A final, more subtle point, is evidence of economic recovery (see Figure 2). Preliminary statistics reveal that Mexico’s exports to the US hit a local minimum of about US$12 billion in January 2009. They have been generally increasing since then. Mexico’s exports to the US in September 2009 hit almost US$17 billion – an increase of over 36%.

Further evidence can be found in the way Mexico’s trade seems to be recovering along the same path as the US trade shown in Figure 1. Trade may be recovering and the adverse shock to Mexican trade during the great trade collapse may be on the wane, if not over entirely.

Long lasting consequences: Big shocks and hysteresis

The great trade collapse may be temporary, but some of the consequences may be permanent and widespread.

Quasi-permanent shifts in production across countries may be linked to the great trade collapse of 2008 because adjusting production is costly. For example, a simple graph of US manufacturing employment over the last 30 years shows that manufacturing employment drops sharply in recessions and then levels off during expansions. In other words, in the presence of adjustment costs, a global recession can provide the shock necessary to “push” firms to restructure production in ways that may have been less attractive during expansionary periods. The contraction forces firms to overcome the fixed costs of shifting production and therefore it is very likely that the great trade collapse will coincide with a significant change in the location of production worldwide.

References

Bergin, Paul R., Feenstra, Robert C., and Hanson, Gordon H. (2009) “Offshoring and Volatility: Evidence from Mexico’s Maquiladora Industry” American Economic Review September, 99(4): 1664-71.

Hanson, Gordon, and Robertson, Raymond (2009) “China and the Manufacturing Exports of Other Developing Countries” forthcoming in Feenstra, Robert and Shang-Jin Wei, Editors China's Growing Role in World Trade, National Bureau of Economic Research. Also NBER Working Paper 14497.

Robertson, Raymond (2009) “Estimating International Labour Complementarity: Some Preliminary Results”, in Soloaga, Isidro (ed) Sobre México: Temas actuales de política económica Universidad Popular Autónoma del Estado de Puebla (UPAEP), Puebla, Mexico, 53-70.

Robertson, Raymond; Brown, Drusilla; Pierre, Gaëlle; Sanchez-Puerta, Laura (eds.) (2009) Globalisation, Wages, and the Quality of Jobs Five Country Studies, The World Bank, Washington, D.C.

Skelton, Edward C. and Quintin, Erwan (2009) “Mexico’s Ano Horrible: Global Crisis Stings Economy” Southwest Economy, Federal Reserve Bank of Dallas, Third Quarter, 3-7.

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Topics:  International trade

Tags:  great trade collapse, developing country trade collapse

Director of the Latin American Studies program and Professor of Economics at Macalester College